8 ms·

Arbitrage is good actually. Tigher spreads make transactions cheaper and safer for the smaller players.

mrob 6y ago
People aren't complaining about arbitrage, they're complaining about microsecond-level timing optimizations. The same benefits to smaller players could be obtained from trading at a human time scale (e.g. something around professional StarCraft player actions per minute).
bigredhdl 6y ago
Just because something has benefit, doesn't mean the benefit outweighs the cost. Specifically we are talking about the opportunity cost of other valuable things these people could be creating. Obviously this can be difficult to measure.
- morei 6y ago
  That's not a terribly strong argument. Should we ban making chocolate as well? Sports? Art? After all, these people could surely be creating something more valuable. If you want to make an argument based on opportunity cost, it generally should have specific alternatives and a viable cost metric. Without that, it's not an argument, just an opinion.
  - TheNorthman 6y ago
    the wise man bowed his head solemnly and spoke: "theres actually zero difference between chocolate & HFT. you imbecile. you fucking moron"
    - birdyrooster 6y ago
      the wise man isn't being a good little ancap
  - jdc 6y ago
    The first step is to measure whatever can be easily measured. This is OK as far as it goes. The second step is to disregard that which can't be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can't be measured easily really isn't important. This is blindness. The fourth step is to say that what can't be easily measured really doesn't exist. This is suicide. — Daniel Yankelovich, "Corporate Priorities: A continuing study of the new demands on business" (1972). https://en.wikipedia.org/wiki/McNamara_fallacy https://en.wikipedia.org/wiki/McNamara_fallacy
  - tekkk 6y ago
    You're way off the mark with your examples. More appropriate ones would be military weapons, multi-level marketing, payday loan firms with ridiculous interest rates, scummy advertisement firms. You might not remember that in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant. Now sure you can argue that they were doing only what the society and themselves considered valuable. But one can only wonder if those smart people had been putting their best effort into other things, say developing agriculture or better industrial processes. I myself did a little day-trading at one period in my life and while I made money, I thought it was the most useless thing I could spend my life in. I was just creating money out of thin air doing basically nothing. Maybe HFT is intellectually more interesting than day-trading but I don't believe it to be very gratifying at deeper level. Perhaps it requires a certain type of person to enjoy that kind of pursuit. I'm definitely not one of those.
    - andai 6y ago
      >creating money out of thin air Taking it from less skilled traders, actually.
      - wglb 6y ago
        Or slower traders.
    - alasdair_ 6y ago
      >in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant. Right. And through all that thinking about silly stuff, people eventually came to the idea that a LOT of this religion stuff is silly and not worth wasting time on, so smart people could skip worrying about it for the rest of human existence if they chose to. (Whereas beforehand, it was considered a super-important thing to think about). You seem to imply all this effort was a waste but ultimately it led to the Reformation, various Renaissance periods and, most importantly, Douglas Adams. I suspect that the same thing will happen with HFT. Either people will stop bothering with it eventually, or they will discover some fantastic new quantum effects that pay dividends for humanity forever more. :)
  - cscurmudgeon 6y ago
    One of my friends made this argument. He was working in ad tech.
  - bigredhdl 6y ago
    Actually, I somewhat agree with you. In the interest of time, I had to just stop at "Obviously, this can be difficult to measure". I find this allocation of resources problem very interesting, but I don't claim to know the answer. You can even flip it around the other way and say "Actually there really isn't anything more valuable they could be doing." It sure seems however there is a ton of brain power being used for things that would benefit society more elsewhere, but who knows.
cma 6y ago
Saving one microsecond is rewarded the same as saving one millisecond, as long as you beat out the next best guy. There are vast diminishing returns to society but the winner is still rewarded the same so incentivized to make it faster and faster, ultimately burning away energy and misallocating capital until the reward is exhausted, and then repeating each time a new generation of hardware is out.
- giantrobot 6y ago
  Not quite, you're forgetting the T in HFT. If everyone was just buying securities a microsecond vs a millisecond might not matter much. What happens is a lot of HFTs act as market makers. They arbitrage positions they create which screws over any non-HFTs. It also moves the price of securities for no reason which affects everyone holding that security. There's also been plenty of cases of HFTs doing front-running and spoofing. The effects of HFTs aren't limited to HFT vs traditional traders. Their artificial arbitrage affects people's retirement funds and the like. It wouldn't be so bad if they were just making money off other traders but instead they're making money off everyone with money in the markets.
  - zozbot234 6y ago
    > It also moves the price of securities for no reason which affects everyone holding that security. Huh? It's narrowing bid-ask spreads, which is beneficial to other market actors. There's nothing "artificial" in it other than betting that the price fundamentals won't move against them, like any other market maker.
  - wglb 6y ago
    > screws over any non-HFT Not true. The HFTs are often market makers and are PAID to be in the market by the exchanges at all times so that others have something to trade.
  - cma 6y ago
    I should clarify I'm referring to pure latency arbitrage stuff and not all HFT.
arbitrage 6y ago
yeah, i've heard that exact excuse repeated all the time on reddit, too.
tgsovlerkhgsel 6y ago
This was actually visible on some cryptocurrency exchanges, where the EURUSD exchange rate differed significantly (>5%) from the regular market exchange rate. I believe that arbitrage within the platform kept the prices and exchange rates consistent (i.e. it didn't matter whether you bought Bitcoin for EUR or first changed the EUR to USD then used that to buy Bitcoin), but of course you could make/lose some money by exchanging EUR <--> USD on the platform then exchanging it back outside (or simply exchanging it on the platform, waiting until arbitragers brought the exchange rate back to normal levels, then exchanging it back). But in effect, the lack of efficient arbitrage between the platform and the "real world" that allowed EURUSD rates to drift so far meant that how much your coins were worth depended on what currency you bought/sold them for, making the whole thing highly annoying. The cryptocurrency markets, which seem less mature/complicated/HFT-overrun than the "big" markets, are great for learning market principles.
ddevault 6y ago
This presumes that the stock market, and capitalism itself, are both a net good. Not everyone would agree with that.
rtpg 6y ago
Arbitrage is good, sure. But what is the timescale that is useful? Is sub-second resolution of arbitrage actually useful? What is the argument against Arbitrage having a lag of even, say, 90 seconds? And like... who cares about the price delta on a time scale even less than an hour apart from day traders? FX stuff I guess?
CalChris 6y ago
Arbitrage does not require HFT. The concept is centuries old dating from when information flowed by horse.
ajkjk 6y ago
Arbitrage is fine. This amount of arbitrage, and the subsequent fighting over microseconds from the exchange, is completely fucking dumb, and I want to live in a world where there is zero money in it.
hakfoo 6y ago
Can we quantify how much advantage we get as retail investors? And how does it compare to the billions spent on dedicated networking, radio gimmickry, and specialized hardware and software magic, plus the opportunity cost of pulling all that talent and capacity from other industries? If every trade settled at, say, the rolling average price of the last 60 seconds-- or 60 minutes-- it would dramatically quiet the "noise" in the market. There would still be enough demand from conventional investors, and the averaging policy could actually stabilize the riskiest scenarios (i. e. a temporary loss of market makers causing orders to settle at comically out-of-bound prices)
- 1123581321 6y ago
  High speed trading is an effective route to achieve that policy as it reduces the need to keep resources tied up in market making, an activity that requires compensation. Any other method to force a uniform price, i.e. a price that cannot quickly change in response to information, creates arbitrage opportunities that are greatly unfavorable to retail investors.

mrob 6y ago

People aren't complaining about arbitrage, they're complaining about microsecond-level timing optimizations. The same benefits to smaller players could be obtained from trading at a human time scale (e.g. something around professional StarCraft player actions per minute).

bigredhdl 6y ago

Just because something has benefit, doesn't mean the benefit outweighs the cost. Specifically we are talking about the opportunity cost of other valuable things these people could be creating. Obviously this can be difficult to measure.

morei 6y ago
That's not a terribly strong argument. Should we ban making chocolate as well? Sports? Art? After all, these people could surely be creating something more valuable. If you want to make an argument based on opportunity cost, it generally should have specific alternatives and a viable cost metric. Without that, it's not an argument, just an opinion.
- TheNorthman 6y ago
  the wise man bowed his head solemnly and spoke: "theres actually zero difference between chocolate & HFT. you imbecile. you fucking moron"
  - birdyrooster 6y ago
    the wise man isn't being a good little ancap
- jdc 6y ago
  The first step is to measure whatever can be easily measured. This is OK as far as it goes. The second step is to disregard that which can't be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can't be measured easily really isn't important. This is blindness. The fourth step is to say that what can't be easily measured really doesn't exist. This is suicide. — Daniel Yankelovich, "Corporate Priorities: A continuing study of the new demands on business" (1972). https://en.wikipedia.org/wiki/McNamara_fallacy https://en.wikipedia.org/wiki/McNamara_fallacy
- tekkk 6y ago
  You're way off the mark with your examples. More appropriate ones would be military weapons, multi-level marketing, payday loan firms with ridiculous interest rates, scummy advertisement firms. You might not remember that in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant. Now sure you can argue that they were doing only what the society and themselves considered valuable. But one can only wonder if those smart people had been putting their best effort into other things, say developing agriculture or better industrial processes. I myself did a little day-trading at one period in my life and while I made money, I thought it was the most useless thing I could spend my life in. I was just creating money out of thin air doing basically nothing. Maybe HFT is intellectually more interesting than day-trading but I don't believe it to be very gratifying at deeper level. Perhaps it requires a certain type of person to enjoy that kind of pursuit. I'm definitely not one of those.
  - andai 6y ago
    >creating money out of thin air Taking it from less skilled traders, actually.
    - wglb 6y ago
      Or slower traders.
  - alasdair_ 6y ago
    >in the Middle-Ages a large portion of intellectuals were spending most of their time debating religion such as is God really omnipotent and what a specific verse in Bible meant. Right. And through all that thinking about silly stuff, people eventually came to the idea that a LOT of this religion stuff is silly and not worth wasting time on, so smart people could skip worrying about it for the rest of human existence if they chose to. (Whereas beforehand, it was considered a super-important thing to think about). You seem to imply all this effort was a waste but ultimately it led to the Reformation, various Renaissance periods and, most importantly, Douglas Adams. I suspect that the same thing will happen with HFT. Either people will stop bothering with it eventually, or they will discover some fantastic new quantum effects that pay dividends for humanity forever more. :)
- cscurmudgeon 6y ago
  One of my friends made this argument. He was working in ad tech.
- bigredhdl 6y ago
  Actually, I somewhat agree with you. In the interest of time, I had to just stop at "Obviously, this can be difficult to measure". I find this allocation of resources problem very interesting, but I don't claim to know the answer. You can even flip it around the other way and say "Actually there really isn't anything more valuable they could be doing." It sure seems however there is a ton of brain power being used for things that would benefit society more elsewhere, but who knows.

cma 6y ago

Saving one microsecond is rewarded the same as saving one millisecond, as long as you beat out the next best guy. There are vast diminishing returns to society but the winner is still rewarded the same so incentivized to make it faster and faster, ultimately burning away energy and misallocating capital until the reward is exhausted, and then repeating each time a new generation of hardware is out.

giantrobot 6y ago
Not quite, you're forgetting the T in HFT. If everyone was just buying securities a microsecond vs a millisecond might not matter much. What happens is a lot of HFTs act as market makers. They arbitrage positions they create which screws over any non-HFTs. It also moves the price of securities for no reason which affects everyone holding that security. There's also been plenty of cases of HFTs doing front-running and spoofing. The effects of HFTs aren't limited to HFT vs traditional traders. Their artificial arbitrage affects people's retirement funds and the like. It wouldn't be so bad if they were just making money off other traders but instead they're making money off everyone with money in the markets.
- zozbot234 6y ago
  > It also moves the price of securities for no reason which affects everyone holding that security. Huh? It's narrowing bid-ask spreads, which is beneficial to other market actors. There's nothing "artificial" in it other than betting that the price fundamentals won't move against them, like any other market maker.
- wglb 6y ago
  > screws over any non-HFT Not true. The HFTs are often market makers and are PAID to be in the market by the exchanges at all times so that others have something to trade.
- cma 6y ago
  I should clarify I'm referring to pure latency arbitrage stuff and not all HFT.

arbitrage 6y ago

yeah, i've heard that exact excuse repeated all the time on reddit, too.

tgsovlerkhgsel 6y ago

This was actually visible on some cryptocurrency exchanges, where the EURUSD exchange rate differed significantly (>5%) from the regular market exchange rate. I believe that arbitrage within the platform kept the prices and exchange rates consistent (i.e. it didn't matter whether you bought Bitcoin for EUR or first changed the EUR to USD then used that to buy Bitcoin), but of course you could make/lose some money by exchanging EUR <--> USD on the platform then exchanging it back outside (or simply exchanging it on the platform, waiting until arbitragers brought the exchange rate back to normal levels, then exchanging it back). But in effect, the lack of efficient arbitrage between the platform and the "real world" that allowed EURUSD rates to drift so far meant that how much your coins were worth depended on what currency you bought/sold them for, making the whole thing highly annoying. The cryptocurrency markets, which seem less mature/complicated/HFT-overrun than the "big" markets, are great for learning market principles.

ddevault 6y ago

This presumes that the stock market, and capitalism itself, are both a net good. Not everyone would agree with that.

rtpg 6y ago

Arbitrage is good, sure. But what is the timescale that is useful? Is sub-second resolution of arbitrage actually useful? What is the argument against Arbitrage having a lag of even, say, 90 seconds? And like... who cares about the price delta on a time scale even less than an hour apart from day traders? FX stuff I guess?

CalChris 6y ago

Arbitrage does not require HFT. The concept is centuries old dating from when information flowed by horse.

ajkjk 6y ago

Arbitrage is fine. This amount of arbitrage, and the subsequent fighting over microseconds from the exchange, is completely fucking dumb, and I want to live in a world where there is zero money in it.

hakfoo 6y ago

Can we quantify how much advantage we get as retail investors? And how does it compare to the billions spent on dedicated networking, radio gimmickry, and specialized hardware and software magic, plus the opportunity cost of pulling all that talent and capacity from other industries? If every trade settled at, say, the rolling average price of the last 60 seconds-- or 60 minutes-- it would dramatically quiet the "noise" in the market. There would still be enough demand from conventional investors, and the averaging policy could actually stabilize the riskiest scenarios (i. e. a temporary loss of market makers causing orders to settle at comically out-of-bound prices)

1123581321 6y ago
High speed trading is an effective route to achieve that policy as it reduces the need to keep resources tied up in market making, an activity that requires compensation. Any other method to force a uniform price, i.e. a price that cannot quickly change in response to information, creates arbitrage opportunities that are greatly unfavorable to retail investors.